cyan AG (XETRA)

Why should you care about Cyan?  They continue to prove their market leading digital security offering by booking new contracts, the most noteworthy a global group agreement with Orange.  This adds a higher level of certainty to financial results over the next 2-3 years (pending successful rollout).  Despite this, the company is trading at ~6.0-7.0x EBITDA vs. peers in the low to high teens.  The stock has suffered from a 2019 EBITDA cut (increased investment spend but increased 2021 EBITDA guidance as a result) and the fact it trades on a lower German exchange (plan to uplist to Frankfurt in 2020).  It was announced on 11/13/19 that the company has retained Lazard for a strategic review, “To fully capitalize on such growth opportunities, the management board of cyan AG has decided to evaluate potential options regarding its US Expansion Strategy.” 

Cyan is a digital security company that offers white-label solutions to mostly mobile network operators, but also other financial companies and governments.  The slide below from their Investor Presentation best summarizes what offerings they bring to the market. 

I’m not an expert on the technology by any means.  Cyan will tell you their key differentiation vs. peers is the ability to offer both On-Net and Endpoint services at scale.  Looking at the contract wins over the past year+, I tend to believe them.

The company has successfully implemented their programs for T Mobile in Austria* and Poland and have announced the following:

  • 11/2018 Aon strategic partnership on digital security
  • 12/2018 Orange global group 6 year contract
  • 7/2019 T-Mobile Austria contract extended, ahead of schedule, by 1.5 years until mid 2022. Added integration of fixed network customers into the customer spectrum
  • 7/2019 Telecom Argentina proof of concept installation
  • 7/2019 Wirecard strategic partnership
  • 11/2019 Flash Mobile sale of 60mm new licenses across LatAm

The Orange contract is the biggie. Across the entire system Cyan will be in 28 countries, exposed to 260mm fixed and residential customers, across residential and business accounts. Implementation has been ongoing throughout 2019 with rollout in France in Q4 2019 with the rest of Europe and Africa to follow in Q1 2020.

Based on the estimated implementation rate of this contract, Cyan issued 2021 guidance of Revenue of at least €60mm. This has since increased to Revenue of at least €75mm and an EBITDA margin target of 50% after the company increased investment spending to capture the additional new business opportunities available. They included the following slide in their Q319 results.

I think the 2021 guidance is conservative. The biggest driver right now will be the successful implementation of the Orange contract. Cyan assumptions here are a 6.4% adoption rate with an average ARPU of €1.56/year. This will vary between €1 to €4 depending on the different areas as Europe will be a lot different than Africa. The T-Mobile Austria and Poland adoption reached 25% in the first 3 years, here the ARPU was between €1.50 to €2. Based on the varying geographies in the Orange deal there will likely be different sales strategies such as opt-in, opt-out, and mandatory plans. As Orange shares in the revenue, they have an incentive to lean towards stickier strategies such as opt-out and mandatory plans that would vastly increase the 6.4% adoption estimate.

Even if we don’t assume any upside to adoption, Cyan currently is trading at <6.5x 2021 EBITDA. Give a low-end peer group multiple of 12x EBITDA, shares would trade at nearly €40 vs. ~€20/share today. That doesn’t include any additional contract wins or the value this asset could have to a strategic with the ability to penetrate the U.S. market. The strategic review outcome is a win-win in my mind: either/or the company lists in the U.S. bringing much deserved attention to the name, or the company sells itself at what I think would be a value at least 2x current prices.

*Worth noting Cyan did a 10% capital raise in July to support the increased level of growth spending and it was done at €28/share. The major shareholders all participated and even agreed to a 12-month lock-up. Management holds ~8% of shares outstanding and ~38% is split between 3 Austrian entrepreneurs.

Microwave Filter Company (MFCO): Trading at 25% of Liquidation Value

The company’s name is pretty self explanatory, MFCO manufactures radio frequency (RF) filters and related components for eliminating interference and facilitating signal processing for the following markets: Cable Television, Broadcast, Commercial and Military Communications, Avionics, Radar, Navigation and Defense.  The 10-K offers as much information as you would expect from a ~$1.2mm market cap company that is attempting to go dark (more on that later).  The radio frequency market, from what I can tell, is very competitive.  It seems like there are a number of Mom and Pop type manufacturers and one large competitor of note is owned by Dover Corporation (DOV).  Long story short, the company doesn’t benefit from a huge moat, but from what I can tell they have built up a solid reputation of being able to deliver custom applications to customers quickly.  When you search for the term ‘Competition’ in the 10-K, the following is the only result,

The principal competitive factors facing both MFC are price, technical performance, service and the ability to produce in quantity to specific delivery schedules. Based on these factors, the Company believes it competes favorably in its markets.”

To be able to produce in such quantity and customization you would need a state of the art facility one would think?  Talk about burying the lead, now we are to the whole point of the article.  The company owns its 40,000 square foot office and manufacturing facility in East Syracuse, NY and the 3.7 acre lot it sits on.  Based on precedent transactions in East Syracuse it seems $75-100/sqft is close to fair value.  That’s at least $3mm for the value of the building compared to $1.2mm market cap.  Let’s jump into quick approximation of what liquidation value would be. 

Liquidation Value Estimate (values as of 6/30/19)

Net Working Capital: $1,097,856

  • Given the company’s backlog of ~$740k, I didn’t make any adjustment to inventory.

Long Term Liability: $(179,178)

  • This is actually a mortgage against the property with KeyBank.  From what I could gather I think proceeds were used for working capital and to shore up the balance sheet after a special dividend in 2012/2013.  Original principal was $500,000, taken out in July 2013 with a 10-year term.

PP&E: $4,925,341

  • $3,500,000 for the value of the 40,000 square feet of manufacturing and office space.  This assumes a price of $87.50/sqft, approximately what a light industrial building sold for in September of 2019. 
  • $259,200 of Land. MFCO is not utilizing all of the 3.7 acres, only about 1 acre at the stated square footage.  I’m assigning what I think is a very conservative estimate of $96,000/acre.  Why $96k? There was a half acre lot that sold for double that amount per acre in June in East Syracuse. 
  • $1,166,141 for Machinery & Equipment.  The estimate is 1/3 of what is listed in the 10-K, again to be conservative.  As stated above, the facility needs to be state of the art to compete and deliver in the quantity and speed necessary for customers.  From the December 2018 10-K:

Efficient computer simulation, design and analysis software enhanced by proprietary MFC developed software, allow rapid and accurate filter development at reasonable cost…Other in-house testing facilities include environmental chambers capable of testing products for temperatures of -40 to 200 degrees Celsius and humidity up to 100 percent. Several high power amplifiers are available for power tests. We have 2500 watt capability from 88-108Mhz with 200 watt capability up to 2200 Mhz. Facilities are also available for salt spray, sand and dust, shock and vibration, RFI leakage and altitude testing.”

  • Total Liquidation Value Estimate = $5,844,019
  • Shares outstanding (as of 8/1/19) = 2,579,238
  • Liquidation Value per Share = $2.26
  • Closing price as of 11/18/19 = $0.51
  • Potential return = 443%

I know I know, there are many reasons to shoot this down.  I will try to answer some of them below and you can ask any I miss in the comments.

Isn’t the business just a melting ice cube?

Not exactly.  While the business is volatile, they jump back and forth between positive EBITDA and should do between $0.2-0.3mm of EBITDA in Fiscal 2019 which ended 9/30/19.  The biggest risk I see is their reliance on a couple large customers.  Two customers usually take up 30-50% of total revenue.  This explains the volatility as different capital spending programs are undertaken.  The business, while not great, could be a lot worse.

So the company is going dark?

Well trying to, in May they filed an 8-K with the following:

On May 2, 2019, the Board of Directors of Microwave Filter Company, Inc. (“MFCO” or the “Company”) unanimously approved the filing of Form 15 which is a voluntary filing with the Securities and Exchange Commission, also known as the Certification and Notice of Termination of Registration.

The Company’s Board of Directors considered the costs associated with the preparation and filing of reports, management time spent on the documents and the costs of outside legal and accounting resources.  The Company will continue to put their financial statements on its
website (”

15 days later they filed a 15-12G showing they have 459 holders of record, quite a ways from the less than 299 needed to go dark.  The company has been buying back shares over the last few years, a couple hundred of dollars at a time, so my guess is they have been trying to work this down.  I don’t see going dark as a negative really, as long as they are still making financials available to us.  The part that would worry me about them going dark is the next piece.

Insiders Own Very Little

Now this isn’t always bad but combined with going Dark, it’s harder to feel like management has your back if they don’t have a material investment in the company.  The 10 person Director and Executive Officer group as a whole own 6.9% of the company.  Normally that would be an average amount but given the market cap is $1.2mm, 6.9% is very little compared to any members net worth, I’m guessing at least. 

Other Investors Involved

Zeff Capital had offered to purchase the company in January of 2018 for $0.72/share.  At the time he had owned 8.6% of outstanding shares.  In the original letter he references the company’s willingness to go Dark.  Zeff withdrew the offer in June of 2018.  He also sold down his stake below 5% recently in 2019 so he no longer has to disclose his holdings.


I think I’ve laid out how unique of a situation this is at MFCO with the company currently trading for less than 25% of my estimate of liquidation value.  At the very least the stock should reflect the value of the office building they own and the net working capital which would give us a even more conservative liquidation value of $1.71/share, 335% greater than the close on 11/18/19.